Chapter 13 bankruptcy is a reorganization bankruptcy. A trustee will be appointed to receive payments from the individual and will pay creditors pursuant to a plan that the individual proposes. Unlike Chapter 7, there is no liquidation of assets in a Chapter 13. Individuals can keep everything they own while they are in repayment.
Chapter 13 is reserved for individuals only. The general purpose to filing a Chapter 13 is to provide individuals an affordable payment plan to pay their creditors what they can after their regular monthly expenses are satisfied. The payment plan can last from 3-5 years from the date the plan is approved by the bankruptcy court. The length and payment amount of any plan is determined by many different factors, including the income/expenses of the individual, types and amount of debt being paid, and value of assets owned. Provided that the individual makes all payments required under the plan, he/she will be eligible for a discharge of any remaining debt and any secured debts that were paid will be brought current.
Why file a Chapter 13?
In some cases an individual may be eligible to file a Chapter 7 or a Chapter 13. So what are the advantages to filing a Chapter 13?
- There is no liquidation, so there is no risk of loss of assets in a Chapter 13.
- Chapter 13 allows individuals to save their home from foreclosure by giving them time to catch up on payments.
- A vehicle can be protected from repossession, or in some cases, ordered to be returned from the creditor after repossession.
- Can provide a reasonable monthly payment on debts that is less than what the creditors want.
- Can provide for orderly repayment of certain non-dischargeable debts at a higher priority such as income taxes, child support, and alimony.
- If an individual is ineligible for Chapter 7 discharge due to a prior Chapter 7 filing, a Chapter 13 discharge may still be available.
- Chapter 13 provides a broader discharge of debts than Chapter 7 including some debts for taxes, penalties for unemployment overcompensation, divorce settlements (not including child support or alimony), willful and malicious damage to property (not to another person).
- Lien Stripping – When an individual’s home or real estate has more than one mortgage on it and the property value is worth less than the 1st mortgage, the 2nd or subsequent mortgage liens may be able to be removed from the property following completion of the plan.
- Cramming down loans – Loans for rental properties or other non-primary residences and vehicles may be reduced to the fair value of the asset and paid off completely within the plan.
Not right for you? Learn about Chapter 7 Bankruptcy here